Goldman: Here's how to play rising interest rates
Investors will be spending much time in 2015 trying to figure out how to play rising interest rates.
According to Goldman Sachs strategists, the answer is fairly simple: Bet on companies that don't see so much turnover in their shares.
Stocks that are held for longer duration in portfolios tend to outperform the broader market when monetary policy tightens, according to a Goldman analysis that peers ahead into an environment likely punctuated by higher volatility as the Federal Reserve comes off its ultra-easy measures.
"Volatility is sharply lower on low turnover stocks than on high turnover stocks, providing for a greater risk-adjusted return," Goldman strategist Elad Pashtan and others said in a recent report for clients. "While seemingly counterintuitive, stocks with very high rates of turnover are more prone to fall during periods of rising volatility and declining liquidity, precisely because these stocks trade more frequently."
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The distinction is important as the Fed finds itself at a crossroads.
While the Open Market Committee holds a dovish bias, it also has sent a clear signal that it wants to begin normalizing policy as soon as economic conditions warrant. The most recent reading on gross domestic product showing a gain of 5 percent for the third quarter likely will only intensify the calls for gradual rate hikes.
Looking over the past 20 years, Goldman said low-turnover stocks outperformed high-turnover by 8 percentage points during higher-rate periods, outperforming in 89 percent of semi-annual holding periods.
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Some of the biggest gainers in 2014 among Goldman's basket of low-turnover stocks include Seaboard (NYSE MKT: SEB), Erie Indemnity (ERIE), Cantel Medical (CMN), Berkshire Hathaway (BRK-A) and HNI (HNI).
